Happy Birthday, Hayek

Friedrich Hayek was born on May 8, 1899 — 114 years ago today — and died on March 23, 1992, just short of his 93rd birthday. In recent years, much of the discussion of 20th century economics has centered around a discussion of the relative influence and contributions of Milton Friedman and John Maynard Keynes, in large part because national fiscal and monetary policy are in such disarray. But it is important to remember that Hayek also did work on some of these issues, including on the business cycle. His lasting influence, however, comes from a very different source: his ability to articulate a coherent attack on the dominant views of central planning that were in fashion during much of that time, especially among the intellectual elites in England.

His most significant work, which culminated in The Road to Serfdom, was his relentless critique of the view that a perfect society could use central planning as a means to achieve incompatible ideals: high production and some preconceived ideal distribution of wealth. His simple insight — prices are an effective means for individuals to coordinate their efforts in ways that allow society to take advantage of widely distributed knowledge — remains, to this day, the strongest argument against central planning of the economy. The ability to pull people back from the brink of socialism led to a massive increase in market activity throughout the world, unleashing the constructive forces of voluntary exchange as a tool to advance overall social welfare.

For that one contribution we should be eternally grateful; but, by the same token, we should not deceive ourselves into thinking that there were no weaknesses in the Hayekian intellectual armament. Here are two.

Some years ago (indeed, on the 100th anniversary of his birth) I wrote a short paper called Hayekian Socialism, which was meant to point out the elements in Hayek’s thought that, in fact, were in serious tension with free market principles.

The short version of the argument goes like this: in dealing with the pressures of his own time, Hayek was intent on getting rid of the built-in protections that workers would receive regardless of the demands for their services. Think, for example, of the position of the miners in England before Margaret Thatcher took office. The price that he was prepared to pay to eliminate this wrong was his willingness to guarantee essential social services, like health care and unemployment insurance. This strategy was a vast improvement over the earlier state of affairs, but Hayek did not see the vast extension of state power that could emerge from a robust Medicare program and 99 weeks of unemployment insurance.

The second error in Hayek was his unwillingness to understand that certain elements in society must be subjected to a form of centralized planning. The government need not set prices and production quotas for all goods and services in the economy. But it does have to lay out infrastructure, condemn the land needed to build it, and find some way to finance it all. That requires extensive planning in a limited sphere, and it is notable that Hayek (like Friedman) was reluctant to wade into this area.

In truth, many of Hayek’s views are extremely relevant to the question that situation poses: how is it that free market principles can help with the creation, financing and maintenance of these essential projects?

No matter how those issues are resolved, however, Hayek’s signal contributions are always cause for renewed celebration.

Hayek’s assertion of the price mechanism as the best organizer of mankind’s efforts and localized knowledge, is one of the greatest contributions to modern economic debate. Most benefits and defenses of the free market flow from this foundational thought.

It also explains why he would be less willing to contemplate centrally planned infrastructure outlays. While the need for such arrangements might be empirically, informally obvious, it is nearly impossible to create rational pricing models for infrastructure.

I finally read The Road to Serfdom a few years ago, and it left me in awe, and I have thought about it almost everyday since. It was published just before the end of WWII, and he was concerned that planned economies, which were how the major combatants were running themselves during the war, would be the model of the future. In the beginning of the book he states that the present Englishman ( I thought: rationed food, lucky to have a bicycle) enjoyed wealth and security that was unimaginable to the Englishman of the not-so-distant past, and that the first duty of the politician/intellectual was to not destroy whatever had enabled that transformation. The very essence of conservatism! He also explained how the immoral rise to the top in a planned economy, and many other corollaries. At publication time, the world had only a few decades of experience with planned economies, yet he understood them so well! He also understood what it would take for a democracy to remain a free market economy – a safety net, and rule of law. He came across to me as a profound, prescient, and brilliant thinker, and anything but hard-hearted.

Stephen Bishop: It is important to remember that in Hayek’s book “The Constitution of Liberty (1966)” he has a postscript called “Why I am not a Conservative”.

Yes, but his positions are nuanced, from the postscript:

The picture generally given of the relative position of the three parties ( speaking of England circa 1966 -Ed) does more to obscure than to elucidate their true relations. They are usually represented as different positions on a line, with the socialists on the left, the conservatives on the right, and the liberals somewhere in the middle. Nothing could be more misleading. If we want a diagram, it would be more appropriate to arrange them in a triangle with the conservatives occupying one corner, with the socialists pulling toward the second and the liberals toward the third. But, as the socialists have for a long time been able to pull harder, the conservatives have tended to follow the socialist rather than the liberal direction and have adopted at appropriate intervals of time those ideas made respectable by radical propaganda.

I think this is still true today in American politics if you substitute libertarian or classical liberal for ‘liberal’.

….Let me return, however, to the main point, which is the characteristic complacency of the conservative toward the action of established authority and his prime concern that this authority be not weakened rather than that its power be kept within bounds. This is difficult to reconcile with the preservation of liberty. In general, it can probably be said that the conservative does not object to coercion or arbitrary power so long as it is used for what he regards as the right purposes. He believes that if government is in the hands of decent men, it ought not to be too much restricted by rigid rules. Since he is essentially opportunist and lacks principles, his main hope must be that the wise and the good will rule – not merely by example, as we all must wish, but by authority given to them and enforced by them.[7] Like the socialist, he is less concerned with the problem of how the powers of government should be limited than with that of who wields them; and, like the socialist, he regards himself as entitled to force the value he holds on other people.

When I say that the conservative lacks principles, I do not mean to suggest that he lacks moral conviction. The typical conservative is indeed usually a man of very strong moral convictions. What I mean is that he has no political principles which enable him to work with people whose moral values differ from his own for a political order in which both can obey their convictions. It is the recognition of such principles that permits the coexistence of different sets of values that makes it possible to build a peaceful society with a minimum of force. The acceptance of such principles means that we agree to tolerate much that we dislike. There are many values of the conservative which appeal to me more than those of the socialists; yet for a liberal the importance he personally attaches to specific goals is no sufficient justification for forcing others to serve them.

…….In the United States, where it has become almost impossible to use “liberal” in the sense in which I have used it, the term “libertarian” has been used instead. It may be the answer; but for my part I find it singularly unattractive. For my taste it carries too much the flavor of a manufactured term and of a substitute. What I should want is a word which describes the party of life, the party that favors free growth and spontaneous evolution. But I have racked my brain unsuccessfully to find a descriptive term which commends itself.